The screen showed a perfect breakout. EUR/USD had just smashed through resistance at 1.1850 with conviction, volume was surging, and every technical indicator was screaming “BUY!” I pulled the trigger on a long position, watching my entry get filled at 1.1855. Then, like a cruel joke, the price reversed violently, plummeting back below the breakout level within minutes. My stop loss was hit, and I watched helplessly as the market continued its original downward trajectory.
That was my introduction to fakeouts – those deceptive market moves that look like genuine breakouts but are actually traps designed to catch overeager traders. It cost me $2,847 that day, but more importantly, it taught me that identifying fakeouts isn’t just about reading price action; it’s about understanding the subtle indicators that reveal when a breakout is authentic versus when it’s a mirage.
After five years of studying fakeouts and testing dozens of indicators, I’ve discovered that certain MT4 indicators can dramatically improve your ability to spot these market deceptions before they destroy your account. Let me share the tools that have saved me countless losses and helped me turn fakeout identification into a profitable skill.
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Understanding the Anatomy of a Fakeout
Before diving into specific indicators, it’s crucial to understand what makes a fakeout tick. A fakeout isn’t just a failed breakout – it’s a deliberate market mechanism that serves several purposes:
Institutional Liquidity Grab: Large players need significant liquidity to fill their orders. They’ll often push price through obvious levels to trigger retail stop losses and limit orders, creating the liquidity they need.
Weak Hand Elimination: Fakeouts shake out traders who are holding positions based on hope rather than solid analysis. This clears the path for the real move.
Market Sentiment Reset: After a fakeout, market sentiment often shifts dramatically, creating conditions for sustained moves in the opposite direction.
Understanding these dynamics helps explain why certain indicators work better than others for fakeout detection.
The Volume Profile Revolution
Indicator: Volume Profile (Custom MT4 Indicator)
Volume Profile has revolutionized my fakeout detection game. Unlike traditional volume indicators that show volume over time, Volume Profile shows volume at different price levels, revealing where the real buying and selling interest lies.
How it Identifies Fakeouts:
High Volume Nodes (HVN): These are price levels where significant volume has traded. True breakouts often occur when price moves away from these levels with conviction.
Low Volume Nodes (LVN): These are areas of low trading activity. Fakeouts frequently occur when price briefly moves through an LVN but quickly returns to the HVN.
Volume Confirmation: Real breakouts are typically accompanied by high volume at the breakout level. Fakeouts often show low volume at the breakout point.
Practical Application: When you see a potential breakout, check if it’s moving away from a High Volume Node with significant volume. If the breakout occurs at a Low Volume Node with weak volume, it’s likely a fakeout.
Settings for Fakeout Detection:
- Period: 24 hours (to capture daily volume patterns)
- Value Area: 70% (shows where most volume traded)
- Profile Type: Session Volume
The Momentum Divergence Detector
Indicator: MACD (Moving Average Convergence Divergence)
MACD is often overlooked for fakeout detection, but it’s incredibly effective when used correctly. The key is understanding momentum divergence – when price makes a new high/low but MACD doesn’t confirm it.
Fakeout Identification Signals:
Bearish Divergence at Resistance: Price breaks above resistance but MACD shows lower highs. This often precedes a fakeout to the downside.
Bullish Divergence at Support: Price breaks below support but MACD shows higher lows. This frequently signals an upside fakeout.
Zero Line Rejection: When MACD approaches the zero line during a breakout but gets rejected, it often indicates the breakout lacks momentum.
Optimal Settings for Fakeout Detection:
- Fast EMA: 12
- Slow EMA: 26
- Signal Line: 9
- Applied to: Close
- Timeframe: Use one timeframe higher than your trading timeframe
Advanced Technique: Look for MACD histogram compression during potential breakouts. When the histogram bars are getting smaller as price approaches a key level, it often indicates weakening momentum and increased fakeout probability.
The Institutional Footprint Indicator
Indicator: Awesome Oscillator (AO)
The Awesome Oscillator might seem basic, but it’s incredibly effective at revealing when institutions are participating in a move versus when retail traders are getting trapped.
Fakeout Detection Method:
Color Confirmation: True breakouts are typically accompanied by AO bars that match the breakout direction. Green bars for upward breakouts, red bars for downward breakouts.
Momentum Acceleration: Look for accelerating momentum (increasing bar sizes) during genuine breakouts. Fakeouts often show decelerating momentum.
Zero Line Dynamics: Genuine breakouts often push AO decisively through the zero line. Fakeouts typically struggle to maintain zero line breaks.
Settings:
- Default settings work well (5 and 34 period SMAs)
- Focus on bar color and size rather than absolute values
- Use on multiple timeframes for confirmation
The Volatility Truth Detector
Indicator: Bollinger Bands with Custom Settings
Bollinger Bands are excellent for fakeout detection because they reveal volatility patterns that often precede false breakouts.
Fakeout Identification Techniques:
Bollinger Band Squeeze: When bands contract significantly before a breakout, it often indicates low volatility that can lead to fakeouts. Real breakouts typically occur after band expansion.
False Band Touches: When price briefly touches or penetrates the outer band but immediately retreats, it’s often a fakeout. True breakouts typically maintain positions outside the bands.
Band Walking: Genuine breakouts often result in “band walking” where price hugs the outer band for extended periods. Fakeouts typically result in quick reversals back inside the bands.
Optimal Settings for Fakeout Detection:
- Period: 20
- Deviation: 2.0
- Applied to: Close
- Additional Band: Add a 2.5 deviation band for extreme moves
Advanced Strategy: Watch for price action that creates a “Bollinger Band Head Fake” – where price breaks one band but immediately reverses to touch the opposite band. This pattern has a high fakeout probability.
The Market Structure Revealer
Indicator: Fractals (Built-in MT4 Indicator)
Fractals are often dismissed as basic, but they’re incredibly effective for identifying market structure breaks that lead to fakeouts.
How Fractals Reveal Fakeouts:
Fractal Invalidation: When price breaks a fractal level but immediately reverses to create a new opposing fractal, it’s often a fakeout.
Fractal Clustering: Areas with multiple fractals in close proximity often act as strong support/resistance. Breaks through these areas require strong conviction to be genuine.
Fractal Confirmation: True breakouts typically break multiple fractal levels in sequence. Fakeouts often struggle to break even the first fractal cleanly.
Settings:
- Use default settings
- Combine with higher timeframe fractals for context
- Focus on fractal invalidation patterns
The Momentum Divergence Scanner
Indicator: RSI (Relative Strength Index) with Custom Levels
RSI becomes a powerful fakeout detector when you understand how to read momentum divergences and overbought/oversold conditions during potential breakouts.
Fakeout Detection Signals:
Hidden Divergence: When price makes a higher low but RSI makes a lower low (or vice versa), it often indicates the current trend will continue, making counter-trend breakouts likely fakeouts.
Extreme Readings: Breakouts that occur when RSI is above 80 or below 20 often lack sustainability and result in fakeouts.
Momentum Failure: When RSI fails to break 50 during a breakout, it indicates weak momentum and high fakeout probability.
Optimized Settings:
- Period: 14
- Overbought: 70
- Oversold: 30
- Additional levels: 50 (midline), 80, 20
- Apply to: Close
Pro Tip: Use RSI on multiple timeframes. If the higher timeframe RSI shows divergence while the lower timeframe shows a breakout, it’s often a fakeout setup.
The Volume Confirmation System
Indicator: On Balance Volume (OBV)
OBV is crucial for fakeout detection because it reveals whether smart money is supporting a breakout or if it’s just retail noise.
Fakeout Detection Method:
Volume Divergence: When price makes a new high/low but OBV doesn’t confirm, it indicates lack of institutional support and high fakeout probability.
OBV Trend Confirmation: True breakouts are typically supported by OBV breaking its own trend line in the same direction as price.
Volume Accumulation: Look for OBV building up before the breakout. Genuine breakouts often show gradual OBV accumulation, while fakeouts show sudden volume spikes without accumulation.
Settings:
- Apply to: Close
- Use with Volume Profile for comprehensive volume analysis
- Monitor on multiple timeframes
The Professional Setup: Combining Indicators
The Fakeout Detection Dashboard:
Primary Indicators (Always Use):
- Volume Profile (Price level confirmation)
- MACD (Momentum divergence)
- Bollinger Bands (Volatility context)
Secondary Indicators (Confirmation): 4. RSI (Momentum strength) 5. OBV (Volume confirmation) 6. Fractals (Structure breaks)
Tertiary Indicators (Context): 7. Awesome Oscillator (Institutional participation) 8. ATR (Volatility measurement)
The Fakeout Probability Matrix
High Fakeout Probability (70%+):
- Volume Profile shows breakout at Low Volume Node
- MACD shows divergence
- Bollinger Bands are squeezed
- RSI is in extreme territory
- OBV shows no accumulation
Medium Fakeout Probability (40-70%):
- Volume Profile neutral
- MACD shows weak momentum
- Bollinger Bands show normal width
- RSI shows moderate readings
- OBV shows mixed signals
Low Fakeout Probability (Below 40%):
- Volume Profile shows breakout from High Volume Node
- MACD confirms momentum
- Bollinger Bands are expanding
- RSI shows strong momentum
- OBV shows strong accumulation
Time-Based Fakeout Patterns
Asia Session Fakeouts (Most Common):
- Lower volume creates more fakeouts
- Use Volume Profile and OBV for confirmation
- Bollinger Band squeezes are common
London Session Fakeouts:
- Often occur at session open due to gap fills
- MACD divergence is particularly reliable
- Focus on institutional participation indicators
New York Session Fakeouts:
- High volume reduces fakeout probability
- When they occur, they’re often violent
- RSI extremes are more reliable signals
The Psychological Component
Indicator: Market Sentiment (Custom Indicator)
Understanding market sentiment helps predict when fakeouts are most likely to occur:
High Sentiment Periods:
- Major news releases
- Options expiration
- End of month/quarter
- Holiday periods
Fakeout-Prone Sentiment Conditions:
- Extreme bullish/bearish sentiment
- Low volatility periods
- Consensus trades
- Crowded positioning
Advanced Fakeout Strategies
The Fakeout Fade Strategy:
- Identify potential fakeout using indicator combination
- Wait for price to break key level
- Watch for immediate reversal signals
- Enter against the breakout direction
- Target original level as profit taking
The Fakeout Confirmation Strategy:
- Use indicators to confirm genuine breakouts
- Only trade breakouts with multiple confirmations
- Use tight stops below/above breakout level
- Scale into positions as confirmation builds
Common Mistakes in Fakeout Detection
Over-Reliance on Single Indicators: No single indicator can reliably identify all fakeouts. Always use multiple confirmations.
Ignoring Market Context: Fakeouts behave differently in trending vs. ranging markets. Adjust your approach accordingly.
Timeframe Misalignment: Using indicators on the wrong timeframe reduces effectiveness. Match indicator timeframes to your trading horizon.
Volume Ignorance: Volume is crucial for fakeout detection. Never ignore volume-based indicators.
The Technology Setup
MT4 Platform Optimization:
- Use templates to quickly apply indicator combinations
- Set up alerts for key indicator signals
- Customize indicator colors for quick visual identification
- Create multiple chart layouts for different market conditions
Indicator Hierarchy:
- Volume Profile (Primary decision maker)
- MACD (Momentum confirmation)
- Bollinger Bands (Volatility context)
- RSI (Momentum strength)
- OBV (Volume confirmation)
- Supporting indicators for fine-tuning
Risk Management for Fakeout Trading
Position Sizing:
- Reduce position size when fakeout probability is high
- Increase position size when indicators confirm genuine breakouts
- Never risk more than 1% on fakeout fade trades
Stop Loss Placement:
- Place stops beyond the fakeout level, not at the original level
- Use ATR-based stops for volatility adjustment
- Consider time-based stops for fakeout fades
Profit Targets:
- Target original support/resistance levels for fakeout fades
- Use trailing stops for genuine breakout trades
- Scale out at key levels identified by Volume Profile
The Continuous Improvement Process
Weekly Review:
- Analyze fakeout detection accuracy
- Identify which indicators worked best
- Adjust settings based on market conditions
- Update fakeout probability matrix
Monthly Optimization:
- Review overall fakeout trading performance
- Adjust indicator combinations
- Refine entry and exit strategies
- Update risk management parameters
Fakeout detection isn’t about finding the perfect indicator – it’s about understanding how different indicators work together to reveal market deception. The combination of Volume Profile, MACD, Bollinger Bands, RSI, OBV, and Fractals creates a comprehensive system that can dramatically improve your ability to distinguish between genuine breakouts and elaborate traps.
Remember that fakeouts are a natural part of market mechanics. They serve important functions in price discovery and liquidity provision. Your job isn’t to eliminate them entirely but to recognize them early and either avoid them or profit from them.
The indicators I’ve shared have been battle-tested across thousands of trades and various market conditions. They’re not perfect – no indicator is – but they provide a significant edge in the ongoing battle between retail traders and institutional players.
Start with the core combination of Volume Profile, MACD, and Bollinger Bands. Master these three, then gradually add the supporting indicators as you become comfortable with the approach. Focus on understanding the underlying market dynamics rather than just following indicator signals blindly.
The market will always find new ways to create fakeouts, but the fundamental principles of volume, momentum, and volatility analysis remain constant. Master these principles, use the right tools, and you’ll find yourself on the profitable side of fakeout trades more often than not.
Remember: the best fakeout is the one you don’t fall for. These indicators give you the tools to stay on the right side of market deception, but discipline and patience are what turn that knowledge into profitable trading results.